Putting Square’s $5B Valuation Into Context

4 years

Square’s growth has been a story of sustained momentum. Rising from a payment-processing run rate of $1 billion in the middle of 2011, Square is now expected to process some $30 billion this calendar year.

As Square’s payment processing run rate has grown — bolstering its revenue in near lockstep — so too has its valuation expanded.

The following set of bullet points lists Square’s reported or leaked processing annual processing run-rates, and most recently rumored full-year figures for 2013 and 2014:

In January of 2011, Square was valued at around $240 million, and two months later reported that it was processing $1 million per day, an implied annual run rate of $365 million. Given Square’s growth rates at that time, doubling from March to April, and again from April to June, it is possible to predict that in January, the company was processing 50 percent less than it was in March, putting its processing volume run rate on par or below its valuation.

In June of 2011 the company was processing at a $4 million daily rate, or an implied $1.46 billion annual rate, and was worth $1.6 billion. That works out to a ratio of 0.9125 processing-rate dollars to each valuation dollar. Here again we see a run rate processing figure below the company’s dollar valuation.

Square’s growth then began to spank its valuation. In November of 2012, Square was processing payments at an annual rate of $10 billion. Two months earlier, it was valued at $3.25 billion. That valuation was pegged from a $200 million investment.

Now investors are putting money into Square at a valuation of around $5 billion (that’s up more than 50 percent since its last valuation point, of course), in between it processing around $20 billion in 2013 (aggregate) and $30 billion this year (aggregate).

Looking at the timing, it appears that Square was able to raise through its Series C on the promise of future growth. We can see this as investors valued its then-extant processing volume at a higher per-dollar figure than they later did. Then, following its $100 million Series C (June 2011), Square delivered incredible growth, and by the time it went back to the well for more capital its processing rate was a multiple of its valuation, not a fraction thereof.

So, investors are now valuing Square more on the strength of its current and perhaps forward 12-month processing volume (to which its revenue is directly tied), and less — again, perhaps — against its three-year growth potential.

Investors that believed Square had a period of hyper-growth ahead of it have become rich due to their bet.

The ratio between processing run rate and the company’s valuation may have stabilized, however. The 50 percent growth in Square’s valuation from its Series D to today’s news is roughly commensurate to its aggregate processing bump from 2013 to the current year. The dates become slightly tricky as we move from run-rate figures to full-year sums, but you can grok the gist.